How To Invest In Cryptocurrencies & NFTs with a Retirement Account

Imagine if you invested $1,000 into a cryptocurrency that skyrockets 10,000x over the next few years. Congratulations, you turned $1,000 into $10 million, which may sound outlandish, but isn’t as uncommon as you might think in the wild world of crypto and NFTs. Now imagine if the government told you that withdrawals on the entire $10 million are 100% yours, with no taxes owing. Instead of having to fork over ~50% to the government, you get to keep the entire pie to yourself. This is the advantage of investing in crypto and NFTs through a retirement plan.

If you’re looking to invest in cryptocurrencies and NFTs through a retirement plan, here are your best options:

Let’s go through them below.

Method #1: Self-directed solo 401k

The best retirement plan for investing in cryptocurrencies and NFTs is the solo 401k because it comes with the highest contribution limits, ability to invest in any asset class (like crypto and NFTs), and has both a pre-tax and Roth option. For 2023, you can contribute up to $66,000 ($73,500 if age 50+) and allocate $22,500 ($30,000 if age 50+) into a Roth solo 401k, giving you tax-free withdrawals in retirement. Furthermore, if your plan provider allows it, you could even do a mega backdoor Roth conversion and contribute up to $66,000 into a Roth solo 401k for the 2023 tax year. That’s 10x higher than a Roth IRA and 3x higher than a Roth solo 401k.

Not all solo 401k plans offer the ability to invest in cryptocurrencies and NFTs. To be able to invest in any asset class, you’ll need to open a self-directed solo 401k, which often comes with checkbook control. When you open a solo 401k plan, you’ll get separate bank and brokerage accounts for your solo 401k plan trust. As the trustee, you get direct control over the checkbook and can invest in any asset class.

Investing in cryptocurrencies through a solo 401k looks pretty much the same as investing in cryptocurrencies through your personal account. You simply open and new account with a cryptocurrency exchange under your solo 401k plan trust, and fund the account with your solo 401k bank account.

How to open a solo 401k

To qualify for a solo 401k, you need to meet two eligibility requirements:

As long as you meet those two requirements, you can qualify for a solo 401k. Unlike a normal corporate 401k plan, the solo 401k is an individual 401k, so you’re responsible for going through the process of setting up an account. If you need help opening your account, you can start your Carry Solo 401k here and one of our advisors can guide you through the set up process.

The best solo 401k plans have a yearly fee, but the features and benefits offered usually far outweigh the costs, especially if you’re using it to invest in alternative assets.

My bank offers a solo 401k – will this work? Unfortunately, not. Major banks and brokerages only offer what’s known as prototype plans. These are cheap, or even free, plans that don’t come with any premium features like a Roth account, the ability to invest in alternative assets, or checkbook control.

Method #2: Self-directed IRA

The most common retirement plan for investing in crypto and NFTs is the self-directed IRA. This is a special kind of IRA that lets you invest in specific alternative asset classes like cryptocurrencies and NFTs. While the contribution limit is 10x smaller than the solo 401k, anyone with earned income can contribute to an IRA while the solo 401k has more eligibility requirements. You can contribute up to $6,500 ($7,500 if age 50+) into an IRA for 2023.

Traditional vs Roth

There are two types of IRAs: The traditional IRA and the Roth IRA. The yearly contribution limit of $6,500 ($7,500 if age 50+) is shared across both accounts, so you’ll have to decide what tax break you’d prefer for the given tax year.

With a self-directed IRA, you can choose whether you want to open a self-directed traditional IRA or self-directed Roth IRA. The traditional IRA gives you a tax-deduction on your contribution, but withdrawals in retirement get taxed as regular income. The Roth IRA doesn’t give you any tax breaks when you contribute, but your withdrawals in retirement are completely tax-free.

Also read: Roth vs Traditional IRA

For example: Let’s say you made $80,000 this year and decide to contribute $5,000 into a self-directed IRA to invest in crypto. If you contribute to a self-directed traditional IRA, the $5,000 contribution will get deducted from your taxable income. Your new taxable income would now be $75,000. The $5,000 invested in crypto would grow tax-deferred until you make withdrawals in retirement, where it will get taxed as regular income. If you, instead, contribute that money to a self-directed Roth IRA, your taxable income would still be the same $80,000. The $5,000 would get invested, grow tax-free and, in retirement, withdrawals would also be completely tax-free, no matter how large the gains may be.

How to invest in crypto and NFTs through an IRA

A self-directed IRA is not available from major banks and institutions. You’ll have to shop around for a third-party provider that specifically allows cryptocurrency and NFT investments.

Method #3: Invest in a cryptocurrency fund

The alternative method to investing in cryptocurrency through a retirement fund is to invest in cryptocurrency funds and trusts. These investments give you exposure to large cap cryptocurrencies like BTC and ETH in the form of a security, while allowing you to avoid the challenges and risks of buying and storing your own coins. The downside, though, is that you don’t actually own any of the coins directly. You can invest based on the performance of certain cryptocurrencies, but you don’t hold any of the assets yourself, which could be a turn off to many investors.

Investing in crypto and NFTs: Solo 401k vs self-directed IRA

There are some major differences in the investment processes for each account that’s worth mentioning here.

With a self-directed IRA, whether it’s a traditional or Roth account, you’re required to go through a custodian each time you want to buy or sell assets. You do not have direct control over the checkbook. If you want to buy a cryptocurrency, you’ll have to instruct your custodian to send the funds and purchase it for you. In the same way, if you want to sell, you’ll also have to instruct your custodian to sell if for you. Because you have to go through a custodian each time, which can take days to process with some providers, it’s not possible to quickly enter and exit positions based on price movements.

A solo 401k, on the other hand, comes with checkbook control. This means that you control the funds in your bank and brokerage accounts directly and don’t need to go through any custodian to buy or sell coins and NFTs.

Can I invest in cryptocurrencies through my 401k?

An employer-sponsored 401k is not typically set up to make investments into alternative asset classes like cryptocurrencies and NFTs. The investment options of a 401k plan are actually the worst out of any retirement plan, only giving you access to a handful of mutual funds that are selected by your employer when they set up the plan.

However, you may still be able to get exposure to crypto through a 401k if your employer allows any investments into a cryptocurrency fund or trust through the plan. But if you want to invest in cryptocurrencies through a 401k on your own, you’ll need to open a solo 401k.

Can I invest in memecoins and altcoins through a retirement plan?

Most self-directed IRAs will give you access to the major high market cap coins, along with some popular altcoins and memecoins. However, your investment options will still be limited to what they allow through their platform.

If you want to invest in altcoins and memecoins that haven’t made it to mainstream media yet, you’ll need a checkbook control solo 401k. With these accounts, you’re free to deposit money into any exchange and invest in memecoins and altcoins of your choice.

Pros and cons of investing in crypto and NFTs through a retirement plan

Pros

Tax advantages: Retirement accounts offer tax benefits that can enhance the returns on your cryptocurrency investments. In a traditional retirement account (like a traditional solo 401k or traditional IRA), contributions are tax-deductible, and gains are tax-deferred until withdrawal. In a Roth retirement account (like a Roth solo 401k or Roth IRA), contributions are made with post-tax dollars, but qualified withdrawals are tax-free, allowing you to enjoy the full benefits of any potential growth in your cryptocurrency investments.

Diversification: Adding cryptocurrencies to your retirement portfolio can help diversify your investments and potentially reduce the overall risk. Cryptocurrencies often have a low correlation with traditional asset classes like stocks and bonds, which may provide a hedge against market volatility.

Potential for high returns: Cryptocurrencies are higher-risk, higher-reward investments and have the potential for significant gains, which could boost your retirement savings. This potential comes with a high level of risk, as cryptocurrency markets can be extremely volatile.

Cons

High risk and volatility: Cryptocurrencies are infamous for their price volatility, which can lead to fast substantial losses as well as gains. Investing a significant portion of your retirement savings in cryptocurrencies could put your retirement goals at risk if the market experiences a downturn.

Limited liquidity: In a self-directed IRA, you cannot directly access or sell your cryptocurrency investments without going through the custodian. This process can be time-consuming and may involve fees, making it harder to liquidate your investments quickly in case of an emergency or if you want to take advantage of a market opportunity.

Custodial and management fees: Self-directed IRA custodians typically charge higher fees than traditional IRA custodians due to the specialized nature of their services. These fees may include account setup fees, annual maintenance fees, and transaction fees for buying and selling cryptocurrencies.

Regulatory risks: While we’ve made a ton of progress over the past few years, regulatory landscape surrounding cryptocurrencies is still evolving, and future changes in regulations could impact the value of your investments or the ability to hold cryptocurrencies in a retirement account.

Limited investment options: Not all cryptocurrencies are available for investment through self-directed IRAs, so you may be limited in your choice of assets. The only way to invest in any coin or NFT of your choosing is to invest through a retirement account with checkbook control like the solo 401k.